Earlier this week I saw Chris Nolan’s new film “Tenet” in a 300 person IMAX theater. Only 5 other people showed up. If COVID-19 wasn’t around, I would prefer the excitement of a busy auditorium because nobody else’s consumption of Tenet would diminish my own. I consume the same amount of Tenet if there are 5 people or 200. Since movie theaters (within the fixed restriction of seat capacity) are non-rivalrous, an economist like Paul Samuelson might argue that they should be publicly provided. James Buchanon, on the other hand, would point out that theaters are excludable, and because of this they could achieve an efficient equilibrium privately. However, the demand for movie tickets is falling due to at-home substitutes like Netflix, and ticket prices are rising, likely due to studios insisting on a majority share of ticket revenue.
Since theaters are struggling to fill up seats, it seems that their pricing techniques do not achieve an efficient equilibrium. Blockbuster movie tickets cost the same as small indie films, and matinees cost the same as more popular nighttime screenings. As Buchanon stipulates: excludability should help firms achieve efficiency, but I deduce that theaters are still under-consumed (relative to QAE) because of inefficient pricing mechanisms, and thus, the private market has not yet achieved efficiency. Ticket prices do not factor in that demand will differ among movies and time. To achieve efficiency, theaters need to restructure their pricing techniques to match current market conditions. They could use price discrimination (dynamic pricing), similar to that of airlines or Über, which would increase their revenue and satisfy more customers.
In summary: movie theaters could operate efficiently in the private market if they used dynamic pricing to reflect the differing demand for certain movies & times.
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